Spring 2007 - (Lang Michener Competition Law Alert )

More than eighty countries now have competition laws. Recent entrants include Singapore, which introduced competition law in 2005, and China, which introduced a merger clearance regime in 2003.

Now the government of Hong Kong is preparing to introduce general competition legislation, recently issuing its Report on Public Consultation on the Way Forward for Hong Kong's Competition Policy (the "Consultation Report") and briefing the Economic Services Panel of the Hong Kong Legislative Council on Monday on changes to its competition policy. Currently, Hong Kong only has competition regulation in the broadcasting and telecommunications sectors.

The government indicated that it would proceed to enact a cross-sector competition law. Hong Kong's Secretary for Economic Development and Labour, Stephen Ip, in his presentation to the Legislative Council, indicated that the government's recent consultation process showed widespread support for a cross-sector competition law, and that the government would begin drafting legislation with a view to presenting a bill to the Legislative Council this year.

Proponents of competition law in Hong Kong have argued that there is a need to ensure a level playing field for Hong Kong businesses, discourage anti-competitive behaviour in the economy and avoid discrimination against certain business sectors through sectoral regulation. There have also been specific allegations of anti-competitive behaviour in specific sectors, including auto fuel, supermarkets and port-related fees.

Opponents of a new law argue that Hong Kong is already a free and competitive market with few entry barriers, competition can be enhanced in other ways and introducing cross-sectoral competition law could increase the cost of doing business locally and affect Hong Kong's regional competitiveness. Some larger corporations have also expressed concern that competition legislation may be used to target existing market structures.

This article discusses the current state of competition policy in Hong Kong, some noteworthy aspects of the recent debate and potential future developments.

Current Competition Law & Impetus for Change

Hong Kong has long been recognized as one of the freest economies in the world, with a policy of positive non-interventionism. Consistent with this, competition law has not previously been a priority for the government.

In 1997, however, in response to the Consumer Council's 1996 report advocating the adoption of general competition law, an advisory body was created – the Competition Policy Advisory Group ("COMPAG") – to deal with competition issues on an ad hoc basis (without any powers of investigation or to impose sanctions).

Then in 2005, the Competition Policy Review Committee ("CPRC") was appointed by the government to review the effectiveness of Hong Kong's existing competition policy. The CPRC examined competition law regimes in a number of other jurisdictions, issuing its Report on the Review of Hong Kong's Competition Policy (the "CPRC Report") recommending that Hong Kong adopt cross-sector competition law.

This was followed by a public discussion paper issued last November by the Economic Development and Labour Bureau, which set out "20 key questions" in relation to the adoption of competition law in Hong Kong, and then the government's recent Consultation Report. Scope of Competition Law

In its Consultation Report, the government stated that it expected the main aspects of a new competition law would include the following:

The definition of anti-competitive conduct to be covered and the introduction of an appropriate prohibition against such conduct.

The establishment of a Competition Commission as the regulatory authority.

A mechanism for exempting from the application of the law conduct that was considered to be in the wider economic or public interest.

Provisions relating to confidentiality and a leniency program.

Penalties applicable to a breach of the prohibition against anti-competitive conduct, refusal to cooperate with investigations or unauthorized disclosure of confidential information.

The government also indicated in the Consultation Report that cross-sector competition law could have a number of benefits. This is consistent with the CPRC's recommendation, whose view was that, as anti-competitive conduct could occur in any sector, there was no basis for only targeting certain sectors or industries. The CPRC also recommended that any new competition law should not target market structures per se, such as natural monopolies.

Hong Kong's framework approach is generally consistent with other major jurisdictions, including Canada, the United States and the European Union, whose competition regimes include general prohibitions with exemptions or block exemptions (e.g., for pro-competitive conduct or where the parties fall under certain market share thresholds).

The government also stated in the Consultation Report that given the difficulty of embracing all possible types of anti-competitive behaviour in an exhaustive list, most respondents favoured a general prohibition. This is also consistent with the CPRC Report, which recommended that, while the new legislation should cover seven types of anti-competitive conduct (price fixing, bid-rigging, market allocation, sales and production quotas, joint boycotts, unfair or discriminatory standards and abuse of a dominant market position), it should not contain lengthy and detailed descriptions of specific types of conduct, in order to allow enforcement flexibility and avoid frequent amendments. This approach is consistent with, for example, the approach to criminal cartel provisions in Canada and the United States, where general prohibitions (e.g., to prevent or lessen competition "unduly" and combinations in restraint of trade) have been amplified by significant bodies of case law.

Merger Clearance

With respect to merger clearance rules, the Consultation Report indicated a lack of consensus on whether merger activity should be included in the scope of a new competition law. Opponents to merger regulation have argued that the new law should only include the seven prohibitions enumerated in the CPRC Report, and that regulating mergers would add a level of unnecessary complexity to transactions and deter foreign investment.

In its presentation to the Legislative Council on Monday, the government indicated that it would take a gradual approach and that no merger and acquisition rules would be initially introduced. If merger control rules are eventually adopted in Hong Kong, it will be interesting to see whether they reflect those of the People's Republic of China, as well as how any regime adopted addresses the unique nature of Hong Kong (e.g., the high degree of concentration in some sectors).

Sanctions & Private Enforcement

The Consultation Report also stated that there was a general consensus that a breach of the competition law should be subject to civil rather than criminal penalties. The government on Monday confirmed that penalties under the new law would initially be limited to civil penalties. This is consistent with the CPRC's recommendations that civil sanctions, including heavy fines and the threat of disqualification from being a company director, would be an adequate deterrent.

One of the most interesting aspects of Hong Kong's new competition law currently being debated is the availability and scope of private actions. The CPRC's recommendation was that parties affected by anti-competitive behaviour should be able to commence civil actions to recover damages, and that proven anti-competitive behaviour should be permitted as grounds to claim damages. The Law Society of Hong Kong endorsed this approach, taking the view that as any anti-competitive conduct would be unlawful, private parties should be permitted to commence private actions based on such unlawful conduct.

If the new competition law includes private rights of action, it will be interesting to see whether any leave or other thresholds are included and the scope of private remedies available (e.g., whether only remedial orders will be available or, as in the U.S., significant monetary damages).

Future Developments

It is not yet clear when the government in Hong Kong will issue draft competition legislation. However, given the significant level of recent activity, as well as the government's presentation to the Legislative Council on Monday, it now appears that Hong Kong may introduce its new law this year. What the precise contours of the law will be, and its impact on businesses operating in one of the most traditionally free markets in the world, still remain to be seen.

In the preparation of this article, James, François and Steve wish to acknowledge the research and writing assistance of Josh Barwick, a student-at-law.